1953 (1) TMI 5 - SC - Income Tax

Whether the sums of ₹ 12,68,480 and ₹ 4,40,878 were sale proceeds of the goods sold by the assessee to merchants in British India or were debts due by the said merchants ? Whether if they were sale proceeds, they were received in British India ? Whether the profits of the assessee s business are included in the sums of ₹ 12,68,480 and ₹ 4,40,878 ? Held that - The High Court was right in holding that the two sums of ₹ 12,68,480 and ₹ 4,40,878 were the sale proceeds of the goods sold and delivered by the appellant to merchants in British India, that they were received by Messrs. Jagmohandas Ramanlal & Co., and by the banks and shroffs through whom the railway receipts were negotiated, on behalf of the appellant in British India, that they were liable to tax under Section 4(1)(a) of the Act as having been received in British India on its behalf, that there is nothing either in the facts and circumstances of the case or in law why they should be exempted from such liability, that the answers given to the questions which were ultimately considered by the High Court were correct, and the appellant was rightly held liable for the tax on these two amounts subject to all just deductions and allowances. The appeal therefore fails and must stand dismissed

Issues Involved:
1. Taxability of sale proceeds received in British India.
2. Application of the mercantile system of accounting.
3. Determination of the place of receipt of income.
4. The distinction between actual and deemed receipts.
5. Interpretation of Section 4(1)(a) of the Indian Income-tax Act, 1922.
6. The role of Section 13 of the Indian Income-tax Act, 1922, in the computation of income.

Issue-wise Detailed Analysis:

1. Taxability of Sale Proceeds Received in British India:
The main issue was whether the amounts of Rs. 12,68,480 and Rs. 4,40,878, representing sale proceeds of goods sold by the appellant to merchants in British India, were received in British India and thus liable to income-tax in British India. The High Court upheld the decision of the Appellate Tribunal, which found that these amounts were indeed received in British India and were taxable under Section 4(1)(a) of the Indian Income-tax Act, 1922.

2. Application of the Mercantile System of Accounting:
The appellant company maintained its accounts according to the mercantile system, which records income when it is legally due rather than when it is actually received. The company argued that under this system, the accrual of profit as shown in the accounts should be the criterion for taxability, and Section 4(1)(a) should not apply. However, the judgment clarified that the mercantile system of accounting does not exempt the company from tax liability under Section 4(1)(a) for amounts actually received in British India.

3. Determination of the Place of Receipt of Income:
For the amounts of Rs. 12,68,480 and Rs. 4,40,878, the High Court found that these sums were received in British India by Messrs. Jagmohandas Ramanlal & Co. and various banks or shroffs on behalf of the appellant. The court emphasized that the first receipt of the money in British India constituted taxable income under Section 4(1)(a).

4. The Distinction between Actual and Deemed Receipts:
The judgment distinguished between actual receipts and deemed receipts. It stated that the phrase "deemed to be received" refers to statutory receipts defined by the Act and not to amounts treated as received due to accounting entries. The court concluded that the amounts in question were actually received in British India, not merely deemed to be received.

5. Interpretation of Section 4(1)(a) of the Indian Income-tax Act, 1922:
Section 4(1)(a) of the Act was interpreted to mean that income is taxable in British India if it is received there. The court held that the amounts received by Messrs. Jagmohandas Ramanlal & Co. and the banks or shroffs in British India on behalf of the appellant fell within this provision, making the profits or gains of the business taxable in British India.

6. The Role of Section 13 of the Indian Income-tax Act, 1922, in the Computation of Income:
The appellant argued that Section 13, which mandates the acceptance of the method of accounting regularly employed by the assessee, should exempt them from tax liability under Section 4(1)(a). The court disagreed, stating that Section 13 pertains to the computation of total income and does not provide an exemption from tax liability for amounts received in British India. The court emphasized that Section 4(1)(a) deals with actual receipts, and the method of accounting does not alter the fact of receipt.

Separate Judgment by Bose, J.:
Bose, J., delivered a dissenting judgment. He argued that the method of accounting, whether mercantile or cash basis, is crucial for tax computation. He emphasized that the profits or gains should be taxed based on accruals or arisals, not actual receipts, under the mercantile system. He suggested that the case should be sent back to the Income-tax Appellate Tribunal for a reframing of questions and a further statement of the case, focusing on the method of accounting and the place where profits arose or accrued.

Conclusion:
The appeal was dismissed, with the court upholding the High Court's decision that the amounts of Rs. 12,68,480 and Rs. 4,40,878 were received in British India and were taxable under Section 4(1)(a) of the Indian Income-tax Act, 1922. The court clarified that the mercantile system of accounting does not exempt the company from tax liability for amounts actually received in British India.

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